A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD S.NO Table of Contents Page No 1 Executive Summary 1-4 2 Company Profile History Overview About Karvy Group Stock Broking Services About Karvy Commodities Broking Limited KARVY Advantage Organization Chart 5-14 3 Introduction to commodity market 15-25 4 Research Methodology 26-29 5 Indian Commodity Futures Market Introduction Commodity trading contracts Future market mechanisms Participants in futures market & trading procedure Limitations of commodity future market 30-46 BABASAB PATIL PROJECT REPORT OF FINANCE
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A project report on commodity market with special reference to gold at karvy stock exchange
A project report on commodity market with special reference to gold at karvy stock exchange
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A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
S.NO Table of Contents Page
No
1 Executive Summary 1-4
2 Company Profile
History
Overview
About Karvy Group
Stock Broking Services
About Karvy Commodities Broking Limited
KARVY Advantage
Organization Chart
5-14
3 Introduction to commodity market
15-25
4 Research Methodology
26-29
5 Indian Commodity Futures Market Introduction Commodity trading contracts Future market mechanisms Participants in futures market & trading procedure Limitations of commodity future market
30-46
6Gold Commodity Future Market Introduction
Gold in Indian Scenario
World Markets
47-60
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Gold an Independent Asset
Turning to demand
What makes Gold Special?
Fixing of spot gold prices
Sources Of Gold For The Goldsmiths
7Investor Awareness And Their Perception
Investment
Aware
Investment in commodity future
Future investment and services expectation
61-65
8 Impact of Spot Gold Market on Future Gold Market 66-69
9 Factors Affecting Future Gold Market 70-78
10 FINDINGS 79-80
11 SUGGESTIONS 81
12 CONCLUSION 82
13 BIBLIOGRAPHY 83
Executive Summary
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Investing in various types of assets is an interesting activity that
attracts people from all walks of life. Investors who are having extra
cash could invest it in securities like shares or any other assets like
gold, which comes under commodity futures market. Commodity
Futures are contracts to buy specific quantity of a particular
commodity at a future date. It is similar to the index futures and stock
futures but the underlying happens to be commodities instead of
stocks.
Now days, the commodity market is in growth stage and the
Karvy Finapolis Belgaum; working as a broking firm wants to
expand and for extensive reach thinking of establishing branches in
various cities of Karnataka.
I have taken the commodity futures, to study and analyze, as it is the
emerging trend in the market, at Karvy Finapolis Belgaum, I have
taken Gold as the commodity to study the Impact of present gold price
on future gold market and its trading mechanism.
Title: “Study of Commodity Market with Special Reference to
Gold.” at KARVY Finapolis Belgaum
Objectives:
To study the mechanism of commodity market.
To study the spot gold market.
To study whether the goldsmiths of Belgaum city aware of
commodity market and their perception.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
To analyses the impact of spot gold market on future gold
market.
To study the factors such as economic factors of US, world
political and other factors affect on future market.
Research methodology:
SAMPLE SIZE: 100 random sample size
SAMPLE TYPE: Simple random sampling
SAMPLE AREA: Belgaum city
TOOL USED FOR ANALYSES:
1. Graphical Representation of Analysis:
Pie charts
Line Chart
2. SPSS
3. Correlation
SOURCES OF DATA COLLECTION:
Primary Data-
Questionnaire
Observation and personal discussion with gold
traders.
Secondary data-
Information collected from different websites likes
Gold World, MCX etc.
From various text books, journals, magazines, news
papers and booklets from company.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
LIMITATION OF THE STUDY:
Spot prices are varying from shop to shop.
Commission has not included spot prices of the
commodity.
Study of awareness and perception of the investor is
only based on sample size.
The study of awareness is limited to Belgaum city.
Findings:
There is positive correlation between both market traders
can easily predict the future prices of the commodities and
hedge their positions.
Most of the respondents are interested in investing in
equity (i.e. 49%) when compared to the other investment
alternatives because they feel investing in equity will provide
more returns to them.
82% of Investors are aware about commodity future
market.
67% of Investors have not invested as they have a
perception that it is risky and they even do not have much
knowledge about trading mechanism.
For gold price fluctuation main reasons are
Dollar depreciation / appreciation
World distress
Increase in money supply
Inflation
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Suggestions:
Both the markets are positively correlated the traders have
knowledge about the commodity demand and supply and their
price fluctuations. So Karvy can approach these traders and they
can easily convince them so these people are the targeted
customers for Karvy.
More Awareness program has to be conducted by Karvy
consultants so that already aware investor takes the challenge to
invest in this commodity future market. Because since this was
new to the market and also risky but gives good return. so it can
be done through by giving advertisements in local channels,
News papers, by sending E-mail to present customers etc
From survey it is found that most of the potential customers are
concerned about the genuine information and moderate
brokerage so Karvy can look upon this. If it can give good
information and charge moderate brokerage it will help to
attract more and more customers.
Conclusion
Capital market is already matured and reached at high level, every
investor interested to invest but not in commodity Future Market due
to lack of awareness. As per Data analysis most of the investors do not
have much idea of commodity market in Belgaum they are required to
be given awareness training and knowledge with the help of workshops
and seminars, as investors are willing to know more about commodity
market. There exists a high degree of positive correlation between
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Spot Commodity Market and Commodity Future Market. If an amount
of small change in the spot gold market prices has the direct impact on
the future prices of gold in commodity market.
COMPAN PROFILE
The birth of Karvy was on a modest scale in 1981. It began with
the vision and enterprise of a small group of practicing Chartered
Accountants who founded the flagship company …Karvy Consultants
Limited. We started with consulting and financial accounting
automation, and carved inroads into the field of registry and share
accounting by 1985. Since then, we have utilized our experience and
superlative expertise to go from strength to strength…to better our
services, to provide new ones, to innovate, diversify and in the
process, evolved Karvy as one of India’s premier integrated financial
service enterprise.
Thus over the last 20 years Karvy has traveled the success route,
towards building a reputation as an integrated financial services
provider, offering a wide spectrum of services. And we have made this
journey by taking the route of quality service, path breaking
innovations in service, versatility in service and finally…totality in
agencies and investors at large are, unfortunately, unaware at present
of the economic utility, the operational techniques and the financial
advantages of such trading.
A futures contract is a legally binding agreement between two
parties to buy or sell in the future, on a designated exchange, a
specific quantity of a commodity at a specific price. The buyer and
seller of a futures contract agree now on a price for a product to be
delivered, or paid, for at a set time in the future, known as the
"settlement date." Although actual delivery of the commodity can take
place in fulfillment of the contract, most futures contracts are actually
closed out or "offset" prior to delivery.
A commodity futures contract is a tradable standardized
contract, the terms of which are set in advance by the commodity
exchange organizing trading in it.
The futures contract is for a specified variety of a commodity,
known as the "basis”, though quite a few other similar varieties, both
inferior and superior, are allowed to be deliverable or tender-able for
delivery against the specified futures contract.
The parties to the contract are required to negotiate only the
quantity to be bought and sold, and the price. The Exchange prescribes
everything else. Because of the standardized nature of the futures
contract, it can be traded with ease at a moment’s notice.
Option Contract:
An option on a commodity futures contract is a legally binding
agreement between two parties that gives the buyer, who pays a
market determined price known as a "premium," the right (but not the
obligation), within a specific time period, to exercise his option.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Exercise of the option will result in the person being deemed to have
entered into a futures contract at a specified price known as the "strike
price." In some cases, an option may confer the right to buy or sell the
underlying asset directly, and these options are known as options on
the physical asset.
Commodity future trading contracts rarely are for the actual or
physical delivery allowed to be settled otherwise than by issuing or
giving deliveries. Therefore, speculators use these futures contracts to
benefit from changes in prices and are hardly interested in either
taking or receiving deliveries of goods.
FUTURE MARKET MECHANISMS
1) Price Discovery through Future Market:
In an active futures market, the demand for information by
traders is enormous. Futures exchanges tend to become collection
centers for statistics on supplies, transportation, storage, purchases,
exports, imports, currency values, interest rates, and other pertinent
information. These data, which are compiled and distributed
throughout the exchange community on a continuous basis, are
immediately reflected in the trading pits as traders digest the new
information and adjust their bids and offers accordingly. As a result of
active buying and selling of futures contracts, the market determines
the best estimate of today and tomorrow's prices for the underlying
commodity. In effect, prices are discovered at futures exchanges.
Prices determined via this open and competitive process are
considered to be accurate reflections of the supply and demand for a
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
commodity, and for this reason they are widely used as today's best
estimate of tomorrow's cash market prices for a standardized quantity
of a commodity.
Price discovery is the process of arriving at a figure at which one
person will buy and another will sell a futures contract for a specific
expiration date. In an active futures market, the process of price
discovery continues from the market's opening until its close. Futures
contracts are standardized as to quantity, quality, and location so
buyers and sellers only bargain over price. Because of this
standardization, commercial interests are better able to compute local
cash prices. In many commodities, futures prices have earned a role as
key reference prices for those who produce, process, and merchandise
the commodity.
2) Transferring Risk: Hedging through future market
Commodity production and marketing involve sizable price risks,
and risk represents a cost that affects the value of a commodity. While
there is no way to eliminate uncertainty, futures markets provide a
competitive way for commodity producers, merchandisers, processors,
and others who may own the actual commodity to transfer some price
risk to speculators who will willingly assume such risk in hopes of
making a profit.
The process of hedging involves the concurrent use of both cash
and futures markets. Since futures and cash prices tend to move
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
together (that is, parallel to each other), and at contract expiration
converge to one price, it is possible for a cotton merchant, for
example, to hedge an unsold inventory of cotton with a sale of an
equivalent amount of futures contracts. Since the merchant owns the
commodity, he would have a loss if prices fell. To hedge, the merchant
would sell futures contracts. Now if prices drop, the cash market loss
will be at least partially offset by a gain on the futures contract. When
the merchant sells his inventory at the lower cash market price, he will
simultaneously lift his hedge by buying back his futures contracts at
the lower price. The gain on his futures contracts should roughly equal
the merchant's loss in the cash market.
Here are three examples of how hedging helps the cash market
work better:
1) Hedging stretches the marketing period. For instance, a livestock
feeder does not have to wait until his cattle are ready to market
before he can sell them. The futures market permits him to sell
futures contracts to establish the approximate sale price at any
time between the time he buys his calves for feeding and the
time the fed cattle are ready to market, some four to six months
later. He can take advantage of good prices even though the
cattle are not ready for market.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
2) Hedging protects inventory values. A merchandiser with a large,
unsold inventory can sell futures contracts that will protect the
value of the inventory, even if the price of the commodity drops.
3) Hedging permits forward pricing of products. A jewelry
manufacturer can determine the cost for gold, silver or platinum
by buying a futures contract, translate that to a price for the
finished products, and make forward sales to stores at firm
prices. Having made the forward sales, the manufacturer can use
its capital to acquire only as much gold, silver, or platinum as
may be needed to make the products that will fill its orders.
These are just a few ways that commodity owners use futures
markets. It requires skill and knowledge acquired that comes only by
study and experience.
PARTICIPANTS IN FUTURES MARKET & TRADING
PROCEDURE
The Futures market participants comprise of:
Farmers
Traders
Producers
Processors
Exporters
Importers
Industries associated with commodities.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
The futures market is used for hedging the price risk and for
trading or arbitrage. Brokers of all commodity exchanges, who are
located all across the country, serve the futures market users directly
through their own branch offices' network or through the network of
their franchisees or sub-brokers.
Procedure for Individual investor to start trading in Commodity
Futures Market can be as follows:
Selection of Broker:
A trustworthy, reliable, efficient, effective & innovative broker,
having membership to any of the Exchange like MCX / NCDEX etc.
would be in Investor’s interest. Broker should be such that recognizes
investors’ needs & aspirations & work as a dedicated team to deliver
highly effective & customized solutions to investors risk management
needs.
Information about Self:
After selecting a broker, investor will be asked to provide
information that is personal & financial. A member client agreement
should be signed between the broker & investor. Investor should give
photographs, bank details & should possess normal DMAT Account or
broker opens that account for him/her. If trading is intended with
delivery of commodities then Commodity DMAT Account is been
opened.
Depositing the Margin:
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
In order to trade futures contracts, investor has to deposit
margins in cash with broker. There are two types of margins, namely;
initial margin & mark to market margin.
i) Initial Margin-
Initial Margin is set by the exchanges on basis of volatility in the
particular commodity & is a percentage of the contract.
ii) Mark to market Margin-
At the end of the day, the contract is marked to market; meaning
trader’s account is credited or debited based on the profit/ loss made
during the session. On this profit or loss there broker can charge
margin that is nothing but mark to market margin.
Intraday Trading:
Then as per individual investors wish he can buy or sell
commodities online. Just he has to specify which commodity & what
price is he going to buy or sell. Electronic terminals are used for this
trading at various broking offices that provides the same information
countrywide. This trading process is called as, “Intraday Trading”.
Benefit of this online trading is that it provides a secure,
transparent, fast and user-friendly system. It leads to better price
discovery of commodities like Bullion, Metals and Agro products by
bringing large number of Buyers and Sellers on a common National
and International platform.
Clearing Trades on Commodity ExchangeAll trades on Commodity Exchange are supported by an initial
margin. At the End-of day Commodity Exchange does mark-to-market
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
of all the open positions. This activity results into final position of all
members in respect to booked losses or losses on open positions.
Members make the shortfalls good by way of pay-ins to Commodity
Exchange by next day and the members in profit on such positions are
given the necessary credits. These payments are processed
electronically through a countrywide network of clearing banks.
Settlement of the Contract and Delivery
A contract has a life cycle of two months. At Commodity
Exchange, 5 days before the expiry of a contract, the contract enters
into a tender period. At the start of the tender period, both the parties
must state their intentions to give or receive delivery, based on which
the parties are supposed to act or bear the penal charges for any
failure in doing so. Those who do not express their intention to give or
receive delivery at the beginning of tender period are required to
square-up their open positions before the expiry of the contract. In
case they do not their positions are closed out at 'due date rate'. The
links to the physical market through the delivery process ensures
maintenance of uniformity between spot and futures prices.
Tendering Delivery to a Buyer by Exchange Seller
Sellers intimate the exchange at the beginning of the tender
period and get the delivery quality certified from empanelled quality
certification agencies. They also submit the documents to the
Exchange with the details of the warehouse within the city, chosen as
a delivery center.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Sellers are free to use any warehouse, as they are responsible
for the goods until the buyer picks up the delivery, which is a practice
followed in the commodities market globally.
Seller would receive the money from the exchange against the
goods delivered, which happens when the buyer has confirmed its
satisfaction over quality and picked up the deliveries within stipulated
time.
Receiving Delivery of Commodities by Buyer
Buyers intending to take delivery will receive it, if there are
sellers willing warehouse at the designated delivery centers on the
designated delivery days.
There are commission agents who help the brokers with handling
of the delivery, logistic support, and associated quality certification
through to give delivery. The Buyer will have to make the payment
within three days after the delivery is allotted. The buyer will take
actual delivery from the empanelled agencies and associated billings
due to tax implications. This support is required as the buyer may be in
a different city than the place where the delivery is being received.
Utility of Physical Delivery of Commodity to Client of Buyer
The client of a buyer may use this delivery for his
consumption in the industry, or for exports, or he may sell in the spot
market or may sell in futures market in the subsequent contract, if he
is a regular trader. Generally, the commodities available in the physical
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
form are consumed by the industry and, rarely, commodities, are
stored in the warehouse for a longer period.
Percentage of Delivery in the Futures Market
Though, Exchanges have specified the deliverable grades in the
contract specifications, which are notified before commencement of
trading in a contract. The seller is required to submit the quality
certification issued by empanelled quality certification agencies, like,
SGS, Geo Chem. etc. Thus, quality of a commodity is ensured, the
percentage is delivery in such market is fairly low. Generally, the
futures markets all over the world are used for hedging where actual
delivery percentage is about 1% any user in the commodities
ecosystem unlike the physical spot or forward market does not use
these markets for regular consumption.
LIMITATIONS OF COMMODITY FUTURE MARKET
Commodity market is very difficult to predict. Commodity prices
depend upon region, monsoon, transportation cost, demand-
supply theory, import/ export policies & Global market trends.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
So commodity market experience volatility that cannot be
predicted easily.
Without knowing the spot market for commodities it is very
difficult to play with Future market. In capital market it depends
upon Companies performance, decisions, long run plans,
mergers, etc. there are definite regions to move up & down in
the market, but in the case of Commodity market there are so
many regions for the market movement, it is like a game of luck
to the investor.
Customer has to deposit the margin amount that is based on
volatility of commodity plus brokerage that is deducted from
total losses made. So if at all there is a loss, the total loss
amount will be very huge. In this aspect it is very risky market.
Commodity market not yet developed in India so it is less
reliable.
Commodity market gives high return but with multiplier of high
risk.
Gold commodity Future MarketIntroduction
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Gold is a unique asset based on few basic characteristics. First, it
is primarily a monetary asset, and partly a commodity. As much as two
thirds of gold’s total accumulated holdings relate to “store of value”
considerations. Holdings in this category include the central bank
reserves, private investments, and high-cartage jewelry bought
primarily in developing countries as a vehicle for savings. Thus, gold is
primarily a monetary asset. Less than one third of gold’s total
accumulated holdings can be considered a commodity, the jewelry
bought in Western markets for adornment, and gold used in industry.
The distinction between gold and commodities is important. Gold
has maintained its value in after-inflation terms over the long run,
while commodities have declined.
Some analysts like to think of gold as a “currency without a
country’. It is an internationally recognized asset that is not dependent
upon any government’s promise to pay. This is an important feature
when comparing gold to conventional diversifiers like T-bills or bonds,
which unlike gold, do have counter-party risk.
Gold in Indian Scenario:
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Gold is valued in India as a savings and investment vehicle and
is the second preferred investment behind bank deposits. India is the
world’s largest consumer of gold in jewelry (much of which is
purchased as investment). The hoarding tendency is well ingrained in
Indian society, not least because inheritance laws in the middle of the
twentieth century lent a great desirability to anonymity. Indian people
are renowned for saving for the future and the financial savings ratio is
strong, with a ratio of financial assets-to-GDP of 93%.
Gold’s circulates within the system and roughly 30% of gold
jewelry fabrication is from recycled pieces. India is typically also the
largest purchaser of coins and bars for investment (>80tpa), although
last year it had to concede first place to Japan in the wake of the heavy
buying in the first quarter due to fears for the stability of the Japanese
banking system. In 1998-2001 inclusive, annual Indian demand for
gold in jewelry exceeded 600 tons; in 2002, however, due to rising and
volatile prices and a poor monsoon season, this dropped back to 490
tons, and coin and bar demand dropped to 67 tons. Indian jewelry off
take is sensitive to price increases and even more so to volatility,
although this decline in tonnage since 1998 is also due in part to
increasing competition from white and brown goods and alternative
investment vehicles, but is also a reflection of the increase in price.
The Indian bride’s “Streedhan”, the wealth she takes with her when
she marries and which remains hers, is still gold, however (thus giving
gold an important role in the “empowerment” of women in India).
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
The distinction between gold and commodities is important. Gold
has maintained its value in after-inflation terms over the long run,
while commodities have declined.
Some analysts like to think of gold as a “currency without a
country’. It is an internationally recognized asset that is not dependent
upon any government’s promise to pay. This is an important feature
when comparing gold to conventional diversifiers like T-bills or bonds,
which unlike gold, do have counter-party risk.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
World Markets
Today's gold market is a round-the-world, round-the-clock
business, played out largely on dealers' trading screens. The core of
the business, however, remains in the key markets of London, as the
great clearing house, New York as the home of futures trading, Zurich
as physical turntable, Istanbul, Dubai, Singapore and Hong Kong as
doorways to important consuming regions and Tokyo where the
Commodity Exchange (TOCOM) sets the mood of Japan. Even Paris still
has a small market, a reminder of the days when the French were
great hoarders, while Mumbai has increasing importance under India's
liberalized gold regime that permits official imports through local
markets.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Gold an Independent Asset
It’s not difficult to understand why the gold price moves
independently from the economic cycle when one considers the
diversity of its demand and supply base, the ultimate determinants of
price movements.
There are three sources of gold supply: mine production, official
sector sales and scrap or recycled gold. Mine production is by far the
largest element, accounting for 70% of total supply last year. Changes
in annual mine supply bear no relation to changes in US or even global
GDP growth. The upward trend in mine production that was underway
in the late 1980s was not arrested by 1990 recession (the US economy
suffered an outright contraction, while world GDP growth slowed to
1.6% from 2.9% the previous year). Nor was the downtrend in mining
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
output that began in 2001 reversed by the sharp acceleration in world
growth.
Mine production is influenced by very specific factors, such as
the level of exploration spending, the success or otherwise in
discovering new gold deposits and the cost of extraction (some new
discoveries may not be economically viable). Lead times in gold mining
are often very long. It can take years to re-open a closed mine, let
alone find and mine new reserves.
The decision to build a mine shaft (and often an entire
infrastructure) is a long term one that will often see business cycles
comes and goes. Central bank decisions to buy or sell gold (they
remain net sellers) are also usually strategic in nature, rather than
reactive to the economic cycle. The decision to buy or sell gold is often
made years in advance and then carried out over a period of years. In
Switzerland, for example, the proposition to sell gold (the first gold
sales programmed) was first recommended by a group of experts in
1997. However, the actual sales programmed did not commence until
May 2000, with the sales then taking place over a period of five years.
Scrap supply is influenced by many factors, perhaps the most
important being price and price volatility, but recessions and periods of
economic distress have also had an impact. The most dramatic
example is when Korea was pushed into recession during the 1998
Asian currency crisis; its scrap supply increased by almost 200 tonnes
as the government bought gold from the local populace in exchange
for won-denominated bonds. It then sold the gold on the international
market in order to raise the dollars necessary to avoid defaulting on its
external debt.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Similarly, in Indonesia the 1998 recession saw scrap supply
increase by 72 tonnes in the first quarter of the year, in this instance
purely for independent reasons rather than at the behest of the
government.
Turning to demand
Conventional wisdom argues that recessions are bad for
commodity prices. The reasoning goes that as consumer and business
confidence falls, demand for goods and services is cut back and hence
the materials used in the production of those goods or in the provision
of services (many of which are commodities) declines, thereby
depressing their price.
The argument is logical. However, a few points are worth bearing
in mind with respect to gold. Demand for gold as an intermediate good
is relatively small in comparison to many other commodities. Last year,
just 14% of gold demand came from the industrial sector (mainly
electronics). This is in stark contrast to base metals and even other
precious metals, where the vast majority of demand comes from
industry. As a result, gold is much less vulnerable to the vagaries of
the economic cycle. That said, demand for gold in electronics is likely
to fall if the economy falls into recession as consumer spending on
non-essential electronics goods declines. A US recession would
undoubtedly have negative implications for gold jewelry demand in
America, as consumer spending slows. However, this negative
implication could be at least partially offset by the higher share of gold
jewelry in the retail market that gold jewelry has enjoyed in recent
years. Moreover, gold is much less vulnerable than other jewelry
materials, such as diamonds or platinum, to a US recession as far more
demand for gold comes from outside of the US – 70% of diamond
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
jewelry demand comes from the US market, compared with just 10%
for gold.
India is in fact the single largest consumer of gold jewellery in
the world in tonnage terms. Last year, Indian households bought 558
tonnes of gold jewelry, more than double their US counterparts (Chart
7). Chinese consumers rank second, having bought 331 tonnes. US
consumers are third in tonnage terms, although US demand remains
highest in retail value terms due to its higher trade margins. The
extent to which worldwide gold jewelry demand suffers from a US
recession will depend partly on the spill-over effects to other countries.
If proponents of “decoupling” prove to be correct (they argue that
emerging market economies are now strong enough domestically to
withstand a US slowdown) then worldwide jewelry demand need not
fare badly.
The final source of demand comes from investors. Investors buy
gold for many reasons. Chief among these are gold’s inflation and
dollar-hedging properties, both of which have been proven over long
periods of time. How a recession affects investment demand would
depend, in part, on how inflation and the dollar react.
The brewing recession has so far been positive for gold on both
fronts. The dollar has continued its downward trajectory, while inflation
has (unusually) headed higher. US consumer prices increased at an
annual rate of 4.0% in February this year, up from 2.4% just a year
earlier. If these trends continue, investment demand for gold as an
inflation and dollar hedge is likely to remain strong. And if the
recession deepens concerns over the health of the US banking sector,
demand for gold as a safe haven asset is also likely to remain robust.
In summary, statistical analysis suggests there is no relationship
between changes in US GDP growth and changes in the gold price. This
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
reflects gold’s unique and diverse demand and supply base, which as
for any freely-traded good ultimately determine the price.
Consequently, a US recession does not have negative implications for
the gold price. The only element of demand likely to be affected by a
recession is investment demand, but that in turn will depend on the
“type” of recession. So far, the brewing recession has been positive for
gold, as it has been accompanied by a rise in inflation and a falling
dollar, which has boosted demand for gold as a dollar and inflation
hedge.
Largest Gold Belts:
The famous Witwatersrand in South Africa - the world's largest
gold belt.
The Tian Shan Gold Belt - the second largest belt in the world.
Largest Gold Producing Country in the World
South Africa
Australia
United States
Important world market:
London is the biggest and the oldest gold market in the world.
Mumbai is India’s liberalized gold regime.
New York is the home of gold future trading.
Istanbul, Dubai, Singapore and Hong Kong are doorways to
important consuming regions.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
What makes Gold Special?
• Timeless and Very Timely Investment: For thousands of years,
gold has been prized for its rarity, its beauty, and above all, for its
unique characteristics as a store of value. Nations may rise and fall,
currencies come and go, but gold endures. In today’s uncertain
climate, many investors turn to gold because it is an important and
secure asset that can be tapped at any time, under virtually any
circumstances. But there is another side to gold that is equally
important, and that is its day-to-day performance as a stabilizing
influence for investment portfolios. These advantages are currently
attracting considerable attention from financial professionals and
sophisticated investors worldwide.
• Gold is an effective diversifier: Diversification helps protect your
portfolio against fluctuations in the value of any one-asset class. Gold
is an ideal diversifier, because the economic forces that determine the
price of gold are different from, and in many cases opposed to, the
forces that influence most financial assets.
• Gold is the ideal gift: In many cultures, gold serves as a family
treasure or a wealth transfer vehicle that is passed on from generation
to generation. Gold bullion coins make excellent gifts for birthdays,
graduations, weddings, holidays and other occasions. They are
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
appreciated as much for their intrinsic value as for their mystical
appeal and beauty. And because gold is available in a wide range of
sizes and denominations, you don’t need to be wealthy to give the gift
of gold.
• Gold is highly liquid: Gold can be readily bought or sold 24 hours a
day, in large denominations and at narrow spreads. This cannot be said
of most other investments, including stocks of the world’s largest
corporations. Gold is also more liquid than many alternative assets
such as venture capital, real estate, and timberland. Gold proved to be
the most effective means of raising cash during the 1987 stock market
crash, and again during the 1997/98 Asian debt crisis. So holding a
portion of your portfolio in gold can be invaluable in moments when
cash is essential, whether for margin calls or other needs.
• Gold responds when you need it most: Recent independent
studies have revealed that traditional diversifiers often fall during
times of market stress or instability. On these occasions, most asset
classes (including traditional diversifiers such as bonds and alternative
assets) all move together in the same direction. There is no
“cushioning” effect of a diversified portfolio — leaving investors
disappointed. However, a small allocation of gold has been proven to
significantly improve the consistency of portfolio performance, during
both stable and unstable financial periods. Greater consistency of
performance leads to a desirable outcome — an investor whose
expectations are met.
What makes Gold different from other commodities?
The flow demand of commodities is driven primarily by
exogenous variables that are subject to the business cycle, such as
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
GDP or absorption. Consequently, one would expect that a sudden
unanticipated increase in the demand for a given commodity that is
not met by an immediate increase in supply should, all else being
equal, drive the price of the commodity upwards. However, it is our
contention that, in the case of gold, buffer stocks can be supplied with
perfect elasticity. If this argument holds true, no such upward price
pressure will be observed in the gold market in the presence of a
positive demand shock.
The existence of a sophisticated liquid market in gold has, over
the past 15 years, provided a mechanism for gold held by central
banks and other major institutions to come back to the market.
Although the demand for gold as an industrial input or as a final
product (jewelry) differs across regions, it is argued that the core driver
of the real price of gold is stock equilibrium rather than flow
equilibrium. This is not to say that exogenous shifts in flow demand will
have no influence at all on the price of gold, but rather that the large
supply of inventory is likely to dampen any resultant spikes in price.
The extent of this to dampening effect depends on the gestation lag
within which liquid inventories can be converted in industrial inputs. In
the gold industry such time lags are typically very short.
Gold has three crucial attributes that, combined, set it apart from
other commodities: firstly, assayed gold is homogeneous; secondly,
gold is indestructible and fungible; and thirdly, the inventory of
aboveground stocks is astronomically large relative to changes in flow
demand. One consequence of these attributes is a dramatic reduction
in gestation lags, given low search costs and the well-developed
leasing market. One would expect that the time required convert
bullion into producer inventory is short, relative to other commodities
which may be less liquid and less homogenous than gold and may
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
require longer time scales to extract and be converted into usable
producer inventory, making them more vulnerable to cyclical price
volatility. Of course, because of the variability of demand, the price
responsiveness of each commodity will depend in part on
precautionary inventory holding.
Fixing of spot gold prices:
spot price
41 41.0 41.0 41.0
59 59.0 59.0 100.0
100 100.0 100.0
Investors
Daily TradingBases/Future Market
Total
ValidFrequency Percent Valid Percent
CumulativePercent
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
Interpretation: In all 100 sample size 59 respondents are gold smiths. All are fix the price according to daily bases, which are displays in TV time to time. In a day in spot market three times price is changes.
Sources Of Gold For The Goldsmiths:
BABASAB PATIL PROJECT REPORT OF FINANCE
41 41.0 41.0 41.0
5 5.0 5.0 46.0
54 54.0 54.0 100.0
100 100.0 100.0
Investors
Local supplier
Wholesaler
Total
ValidFrequency Percent Valid Percent
CumulativePercent
spot price
59.0%
41.0%
Daily Trading Bases/
Investors
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
commodities
54.0%
5.0%
41.0%
Wholesaler
Local supplier
Investors
Interpretation:
Above Pie chart shows that out of 100 sample size, 54%
of respondents get gold from wholesalers, 5% are from local suppliers
and remaining are investors. So most of them get the gold from
wholesalers.
To study whether the goldsmiths of Belgaum city
aware of commodity market and their perception.
Where do you prefer to invest?
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
invest
9 9.0 9.0 9.0
10 10.0 10.0 19.0
49 49.0 49.0 68.0
28 28.0 28.0 96.0
4 4.0 4.0 100.0
100 100.0 100.0
Gold
Bank/Fixed Deposit
Equity
Mutual Funds
Real Estate
Total
ValidFrequency Percent Valid Percent
CumulativePercent
invest
4.0%
28.0%
49.0%
10.0%
9.0%
Real Estate
Mutual Funds
Equity
Bank/Fixed Deposit
Gold
Interpretation:
The Graph clearly shows that most of the respondents are interested
in investing in equity (49%) when compared to the other investment
alternatives because they feel investing in equity will provide more
returns to them.
Are you aware about commodity market?
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
aware
82 82.0 82.0 82.0
18 18.0 18.0 100.0
100 100.0 100.0
Yes
No
Total
ValidFrequency Percent Valid Percent
CumulativePercent
aware
18.0%
82.0%
No
Yes
Interpretation:
The above pie chart describes that 82% of the investors (goldsmiths or
gold traders) are aware about the Commodity Future market and 18%
of them are not aware about Commodity Future Market. So there is a
need to create awareness about the commodity future market and its
benefits. There is a lot of potential is there to create customer and
influence them to invest in Commodity Future market.
Have you invested in commodity future market?
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
commodity
17 17.0 17.0 17.0
16 16.0 16.0 33.0
67 67.0 67.0 100.0
100 100.0 100.0
Not aware
Yes
No
Total
ValidFrequency Percent Valid Percent
CumulativePercent
commodity
67.0%
16.0%
17.0%
No
Yes
Not aware
Interpretation:
The pie chart shows that, even though the investors are aware about
commodity future market only 16% of them have actually invested in
this market where as the remaining have not invested because among
them 17% are not aware and remaining 67% investors have not
invested as they have a perception that it is risky and they even do not
have much knowledge about trading mechanism.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
In future do you want to trade in commodity future
market?
future
16 16.0 16.0 16.0
61 61.0 61.0 77.0
23 23.0 23.0 100.0
100 100.0 100.0
Investors
Yes
No
Total
ValidFrequency Percent Valid Percent
CumulativePercent
future
23.0%
61.0%
16.0%
No
Yes
Investors
Interpretation:
The above pie chart represents that, the investors who have not yet
invested in the commodity future market, out of them 61% of the
investors are interested to invest in the coming future.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
What type of services does you except from your
broker?
service you expect from your broker
69 69.0 69.0 69.0
13 13.0 13.0 82.0
13 13.0 13.0 95.0
5 5.0 5.0 100.0
100 100.0 100.0
Genuine Information
Moderate Brokerage
Good Service
Recommendation
Total
ValidFrequency Percent Valid Percent
CumulativePercent
service you expect from your broker
5.0%
13.0%
13.0%
69.0%
Recommendation
Good Service
Moderate Brokerage
Genuine Information
Interpretation:
The graph shows that, the investors expect that the brokers should
provide them the genuine information regarding the market. Also they
want moderate brokerage and good services from the brokers.
BABASAB PATIL PROJECT REPORT OF FINANCE
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD
To analyses the impact of spot gold market
on future gold market.
My Fourth objective is to identify the impact of Spot gold
commodity market on Gold Commodity Future market, means how the
prices prevailing in the commodities affect the Commodity Future
Market. The following table and chart shows the Correlation between
10-16 Dec 2007 10207.29 10253.8617-23 Dec 2007 10270 10281.8624-30 Dec 2007 10577.86 10477.4331,1-6 Jan 2008 10729.14 10841.437-13 Jan 2008 10902.14 11229.4314-20 Jan 2008 11291.43 11310.1421-27 Jan 2008 11434.43 11477.7128-31 jan,1-3 Feb 2008 11582.71 11681.294-10 Feb 2008 11609.43 11577.5711-17 Feb 2008 11677.43 1160018-24 Feb 2008 12024.71 11960.2925-29 Feb,1-2 Mar 2008 12320.29 122713-9 mar 2008 12735.29 1270010-16 Mar 2008 12895.29 12863.2917-23 Mar 2008 12503.14 12435.4324-30 Mar 2008 12149.57 1214431,1-5 Apr 2008 11724.67 11699.33
A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD